Q: I am writing to gather some clarity regarding several operational and legal aspects of our homeowners association. As we look toward improving our community’s financial health and oversight, I would appreciate your insights on the following:
1. Reserve fund investment
Does the management company typically invest our reserve funds to generate interest income? If so, what are the standard low-risk vehicles used (e.g., CDs or money market accounts), and how are those returns reported to the board?
2. Managing high renter density
Our CC&Rs do not currently cap the number of leased units, and the community is feeling the impact of high renter turnover. Since the governing documents are silent on a cap, what is the process for amending them to include a rental ceiling? Additionally, are there secondary strategies we can use to manage this in the meantime?
3. Leasing administrative fees and tracking
To better manage the administrative burden of rental units, can the HOA implement a mandatory “Leasing Administrative Fee” for owners who rent out their homes? We would also like to establish a formal database to track leased units and ensure we have current tenant contact information for emergency purposes. Is this legally permissible under our current bylaws?
4. Formation of specialized committees
We are interested in increasing homeowner involvement through the creation of advisory committees. Specifically, we are looking at: Finance/Expense Committee: To audit current spending and vendor contracts; Security Committee: To evaluate community safety measures; and Capital Investment Committee: To prioritize long-term reserve projects.
Does the board have the authority to charter these committees immediately, and what are the standard protocols for their operation?
A: 1. Often a management company will provide recommendations as to what institution your association should deposit your reserve funds, but the decisions as to association’s reserve accounts should be made by the board of directors in concert with their CPAs (certified public accountants), their reserve specialist and with their management company. Some associations also rely upon investment specialists, especially with the larger associations that have multimillion-dollar reserves.
Let’s look at NRS 116.311395. The state law has the following requirements. The institution is located in this state or is qualified to conduct business in this state and has consented to be subject to the jurisdiction, including the power to subpoena, of the courts of this state and the division. Under Section 2, except as otherwise provided by your governing documents, the financial institution shall deposit funds that are insured by either the Federal Insurance Corp., or the National Credit Union Share Insurance Fund and or the Securities Investor Protection Corp. with a private insurer approved pursuant to NRS 672.755 or in government security backed by the full faith and credit of the government of the United States.
Section NRS 672. 755 authorizes the Nevada Commissioner of Financial Institutions and the Commissioner of Insurance to approve private insurers for insuring credit union deposits that they maintain adequate capital and reserve ratios comparable to the Federal Credit Union Act.
An association can deposit funds in certificates of deposits (CDs) whose maturity dates should correspond with major expenditures as recommended by their reserve study. They don’t have to mature at the same time. Some associations vary their investments and may have U.S. Treasury bonds.
The conservative approach is investing in CDs since most boards do not have investment specialists on their executive committee. Interest rates and terms should be related to the reserve study expenditures.
2. Your association should discuss this issue with your attorney. In general, a Nevada association can amend its governing documents to cap the number of rental units, but most likely the cap will not apply to current owners who are already renting or purchased before the amendment was passed. NRS 116.335 was amended by the state Legislature, effective July 1. Under Section 1, if the declaration authorizes or prohibits or restricts the owner from renting or leasing his or her unit or contains a provision establishing a maximum number or percentage of units in the association which may be rented or leased, the association may adopt rules and regulations to prohibit the leasing or renting of the units to the extent that the restriction is reasonably related to meet the underwriting requirements of an institutional lender that regularly makes loans secured by their first mortgages or by insurance companies that issue policies to the associations or units within the association.
As to secondary strategies, speak with your attorney to determine if you can pass regulations that require owners to obtain credit and criminal checks or that leases must have a year term, etc.
3. Again, please work with your attorney. Under NRS 116.3115 (4b) any common expense benefiting fewer than all of the units may be assessed exclusively against the unit owners that benefited. Your regulation would need to include the extra “benefits” to impose such an assessment.
4. Yes, the board, following its governing documents, can create committees. You would need to approve the committees and their charters at an open board meeting where the action items were placed on the agenda. The committees listed by this reader are excellent ones.
Barbara Holland, CPM, CMCA, AMS, is an author, educator and expert witness on real estate issues pertaining to management and brokerage. Questions may be sent to holland744o@gmail.com.
